Inflation worries can't just be shrugged off : COMMENT

Click to follow
The City reckoned that Mr Clarke would be inclined to hold off rising interest rates after looking at yesterday's mass of economic statistics, despite the rise in inflation last month. Although the rhetoric of monetary policy has been extremely tough, there were enough special factors in January to excuse retail price inflation's rise above 3 per cent.

The interesting question is whether inflation will tamely tail off again, justifying postponement of the next increase(s) in base rates. The special factors will certainly fade away. One was a fall in mortgage rates in January a year ago, which raised the headline rate of inflation this year. Another was the partial passing on of excise duties raised in the mini- Budget, and higher gas prices to consumers.

Based on this type of analysis, the Bank of England is sticking to its forecast that the inflation hump will be passed quite quickly. But there are clearly grounds for worrying about this analysis. The data on producer prices, published earlier in the week, suggest the commodity price bulge is travelling along the inflation pipeline. Industry's raw material and energy costs last month were rising at their fastest rate for 13 years. Prices charged at the factory gate rose to their highest rate in nearly a year.

Meanwhile, industrialists make it clear that they are trying to pass higher costs on to their customers. In the worst-affected sectors, such as plastics and metals, firms have achieved their first big rise in list prices since the recession began. Anecdotal and survey evidence strongly suggests that the inflation psychology of British companies has not fundamentally changed. (Nor, sadly, has their preference for the quick fix of takeover rather than the harder, longer slog towards greater competitiveness.)

Inflation optimists mostly accept that companies would like to pass on their higher input costs, but argue that there is still no chance of those increases being passed on in turn to consumers - witness the fact that the volume of retail sales has been flat as a pancake for the past six months. High street competition, coupled with consumers who just don't want to shop any more, will do the Chancellor's work for him.

Unfortunately, it could be a mistake to think the British consumer has changed forever. It overlooks the fact that personal incomes will grow more strongly in 1995 than in previous years, even allowing for the deadening impact of those deferred tax increases still in the pipeline.

The other danger is the clear evidence that pay levels are starting to creep up. The headline figure - underlying average earnings growth - is unchanged, but growth in the unadjusted measure of earnings has picked up, and settlements are clearly higher this pay round than last, especially in manufacturing industry. Old habits die hard.

Still, we should also beware of that other great British disease, of worrying ourselves into a lather over what is still a potential rather than an actual problem. The news on the employment front is better; and last year looks like being the best year for labour unrest number of working days lost, number of stoppages - since records began in 1891. Our unemployment rate is now at the bottom end of the range in Europe, thanks in part to our place in the economic cycle, and it is falling earlier and faster than at the previous peak in the cycle.